Employee Sponsored Plans Flashcards
What are the characteristics of Defined Contribution (DC) Plans?
- Separate participant accounts
- Employer and/or employee contributions
- Contributions as a percentage of pay
- Government limitations on contributions
- investment risk Bourne by the employee
What are the Advantages of Defined Contribution plans for the Employee and for the Employer?
Employer:
Contributions comprise the majority of plan expenses
Expenses can be easily budgeted
Employee:
More control over employer provided investments than with Defined Benefits plans
Portable tax deferred retirement vehicle
Disadvantages of Defined Contribution Plans for the employer and the employee?
Employer:
Complexity of legal requirements (non- discrimination testing, fiduciary accountabilities)
May not provide the desired benefit when the employer wants individuals to retire
Employee:
Requires greater financial awareness
May not provide the desired benefit when the employee is ready to retire
Types of Defined Contribution plans
401K
403b
457b
IRA
Savings/Thrift
Profit Sharing
Money Purchase
Employee Stock Ownership Plan (ESOP)
Target Benefit
Define 401K plans:
Definition:
Features:
Definition:
Enables employees to make pretax contributions through salary reduction agreements within the format of a CODA cash or deferred arrangement.
Features:
Employees contribute specified percentage through payroll deduction
Employer typically matches a percentage of employee contributions
Investments cover broad range of mutual funds to cover all major asset classes
Tax deferred earnings on investments
Automatic contribution rate increases/escalator provision - overcomes passively maintaining same contribution rate over time
Automatic enrollment requires employee to actively request to be excluded from the plan
Define 403b tax sheltered annuity
Definition:
Features:
Definition:
Similar to 401k offered to tax exempt organizations: public school, college, university and certain charitable organizations
Tax advantages for participants
- tax deferred contributions
- tax deferred earnings on retirement money
- carry over annuity when changing jobs or retire
457b definition
Definition:
Tax deferred retirement plan available to employees of government and certain tax exempt organizations. Defer on a pretax basis. Contributions through payroll deduction up to prescribed limits.
Like 401k - catchup contributions participants over 50
Tax deferred
What are the 2 types of Individual retirement accounts
Traditional IRA
Roth IRA
Are IRAs company sponsored plans?
No - personal savings Pilar of retirement funding sources
Define traditional and Roth IRAs
Traditional IRA: contributions are tax deductible and withdrawals are taxed at the then current rate
Roth IRA: contributions are not tax deductible, qualified withdrawals are exempt from federal taxes
Define Savings/Thrift Plan
Definition:
Features:
Definition:
Employee contributions on a discretionary basis with potential employer match
Features:
- usually has a matching employer contribution
- supplement other retirement plans
- contributions typically after tax if no 401k
Define Profit Sharing Plan
Definition:
Features
Definition:
Employer defines a formula to allocate profit shares to employees
Features:
- employer contributions
- contributions not required
- may include a IRC 401k salary reduction feature rarely standalone
Define Money Purchase Plan
Definition:
Features:
Definition: Can include contributions from employee and employer based on a formula
Features:
Contributions from employer and employee after tax
Does not allow pretax contributions
Annual contribution required, regardless of company profitability.
Annuity
Employee Stock Option Plan (ESOP)
Definition:
Features:
Define:
A plan that allows employees to receive accrued shares upon retirement or separation.
Features:
Both employer and employee contributions, primarily company stock
Legal requirements broad based employee participation
Employer receives tax advantages and financing opportunities
Distributions may be lump sum or installments over several years
What does a 401(k) feature in a defined contribution plan do?
Enable qualified employees to buy company stock at a reduced price
Includes a predetermined and defined formula for allocating profit shares among participants
Enables employees to make pretax contributions through salary, reduction agreement agreements
Credits employee accounts with varying contribution percentages calculated individually at the time of the plan in inception
Enables employees to make pretax contributions through salary reduction agreements
Which of the following best describes a money purchase plan
An employer contributes to the employee’s account based on a formula, regardless of profits
Employees, retirement funds are comprised mostly of company stock
Stock ownership in private organizations is transferred from owners to employees
Employee share in the success of the organization
An employer contributes to the employees account based on a formula, regardless of profits
Which plan allows employees to make contributions on a discretionary basis within limits
Money purchase plan
ESOP
Savings thrift plan
Profit sharing plan
Savings thrift plan
The internal revenue code place a certain re-purchase obligations on companies with which of the following
Target benefit plan
ESOP
Cash balance plan
401(k) feature with defined contribution plan
ESOP
Which of the following plans combines features of a defined benefit plan and those of a defined contribution plan
Money purchase plan
Cash balance plan
Savings thrift plan
Employee stock owner support
Cash balance plan
Which define contribution plans are considered hybrid
Cash, balance, plans, and target benefit plans
Why do employers offer hybrid retirement plans
Portability
Transfer of risk
Increased flexibility in plan design
Reduced administrative expenses
Reduced funding expenses versus traditional defined benefits, plans
Which defined contribution plan is considered a hybrid plan with a hypothetical account
Cash balance plan
Define cash balance plan
Definition
Features
Definition
Blends the features, a traditional define benefits plan with the features of a defined contribution plan
Features
Accounts are hypothetical
Contributions - employer as a percentage of pay
Investments - guaranteed rate
Regulation— ERISA
Give an example of how a cash balance plan is set up
Plan provides a benefit of 5% of pay annually with an interest credit equal to the one year T bill rate in effect on the first day of the plan year
